News from the Front Line
Written by Julian Wheeler – Partner and US Equity Specialist
Investment decisions can be made based on many things, usually referred to under headings such as ‘fundamental’ ‘technical’ ‘thematic’ or ‘macro’. Whichever you choose, perhaps a combination of several, I am always happiest if I have been able to speak in person to the management of any company in which I might be tempted to buy shares.
Part of my job means I am fortunate to do so on occasion and last week I attended a string of small group meetings with some large, well-known US companies, kindly hosted by Bank of America and the NY Stock Exchange. So, what did they have to say about their various businesses, which ranged from leading edge technology and industrial products, to commodities, mass retail and fast food?
Identities withheld so I don’t fall foul of any non-disclosure rules, you won’t be surprised to read that of the four companies I met who sell products directly into the AI coal face that is the data centre, all were incredibly positive and optimistic. With almost half a trillion in market value between them, their answer to questions concerning a possible slowdown in orders was best summed up by this answer given to me directly. “Our customers have said that if we can supply it, they’ll take more product and sooner.” These are physical components I am talking about here, so the gating factor as usual, is supply. “We could sell our backlog today if the supply chain could meet it”. Well, indeed, that’s why we use the term backlog!
For investors in a boom driven by capital expenditure, there are always two things to consider: the first is whether all the good news is already priced into the shares after an enormous gain; the answer to that is a subjective one. The second, often harder one, is will we be able to spot any sign of weakness early enough to get out. History suggests that the companies themselves can never really see, no matter what they may say, whether customers are ordering early in ever increasing amounts to avoid higher prices in future and because they know there are current shortages. Just like investors buying a ‘hot’ IPO – orders are often inflated to ensure that you receive whatever is available.
But if you accept what they say then, given visibility of orders into 2028, from deep pocketed customers prepared to pay higher prices in their rush to get to market, it suggests that corporate margins continue to rise….and the share prices with them. Does this sound like the ‘dotcom’ bubble? No comment.
I also met a producer of industrial metal, whose shares are being driven by the same trends; but this industry is much more accustomed to boom and bust cycles, so to be shown a presentation which included a large addition to capacity next year definitely gave me pause before wishing to commit given the rise in the share price already this year.
What of the US consumer, the one you should never bet against? Well, according to one of the largest retailers “the consumer is still robust”. The ‘K’ shaped economy (where the top and bottom are going in opposite directions: they don’t see it. Now, to be fair, buying into this company is about them succeeding or failing from here based on their own efforts at recovery, but it was all more encouraging than I expected. In similar fashion, a seller of commercial and industrial air conditioning units said that their cautious forecasts made early in the year were proving overly pessimistic and “we could do better than we thought”. They sell into Europe as well, where they said, “we don’t see it getting worse”.
Food trends appear to be following a healthier pattern, and it seems that the impact of the weight loss drugs is real. One of the largest companies in fast food told me they had pivoted to more protein-based menus and with smaller portions too. How very un-American! But what is better for health should also be better for company profits. I liked this story.
However, there was also one clear avoid which is IT Services. The first casualty of the shift to AI in workplaces is clearly going to be any company who makes money charging by the hour for people to implement processes, or consumer facing software, which can now be done faster and cheaper by a machine. Those moats are being filled in rapidly. The clearest indication of this became apparent within 48 hours of my meeting, when the world’s largest provider of this type of service reported their results and outlook. Accenture saw their shares collapse by more than 25%. Is it value at this price? Never buy technology based on ‘value’ – nothing is too expensive if it is perceived as getting better (just ask people buying Space X) while it is never cheap enough if things are getting worse.
For more background on our U.S. market views, visit the Over the Pond archive.
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